Timing the market is enormously important for property investing

[mcarans]

Contrary to the saying "time in the market beats timing the market", capital gains for property vary massively depending on when you buy and sell, even if you hold for a long time (e.g. 10 years, which is a commonly suggested timeframe for property).

https://imgur.com/a/DxlQavJ

The linked charts show the inflation adjusted annual change in house prices averaged over the previous 10 years (using ABS data from 1986 to 2021).

Nationally, price growth averaged 3.7% PA over this period, but varied from a high of 7.1% if you bought a place in December 1997 and sold in December 2007, to a low of 0.3% PA if you held from March 1989 to March 1999.

The differences are even more stark at a city level. If you owned a house in Perth from December 1996 to December 2006, you made almost 10% PA, but if you bought in March 2010 and sold in March 2020, you lost 2.5% PA. Even cities like Sydney are hugely variable over between 10 year periods - June 2003 to June 2013 returned only 0.5% PA, while March 1994 to March 2004 returned 6.8% PA.

I found these results quite interesting, as I (and I'm sure plenty of property investors) assumed that a 10 years would be typically be long enough to see a reasonable return. In reality, a more realistic timeframe is probably 15-20 years or longer.

 

[civil82]

@mcarans

Contrary to the saying "time in the market beats timing the market"

The saying "time in the market beats timing the market", refers to the well documented tendency for investors to be highly penalized for active trading.

It's not intended to mean long term market returns are going to be good, even over a 20 year period - it just means if you try to actively trade, you'll probably do even worse.

It applies to the property market as much as anything else, maybe more so. Property has the problem of huge entry and exit fees, so that's a huge disincentive to active trading.

A 10 year period of broad market capital loss is not unique to property as you imply.

capital gains for property vary massively depending on when you buy and sell,even if you hold for a long time (e.g. 10 years...)

The ASX200 hit 6696 in Nov 2007. It fell and wouldn't reach this price again until July 2019, 12 years later.

The Japanese market famously delivered -80% (that's minus eighty percent) over a 20 year period.

The variability of capital gains based on timing is hence not unique to property - but that wasn't the intended meaning of "time in the market beats timing the market"

Of course looking only at capital pricing and not total returns doesn't tell the whole story, for property or shares.

I agree with the broad thesis that investors should accept the possibility of >10 years of poor returns. Sadly I often see comments here suggesting users house deposit savings be invested in shares.

 

[felonna]

@civil82

The ASX200 hit 6696 in Nov 2007. It fell and wouldn't reach this price again until July 2019, 12 years later.

I know you did raise not only looking at capital gains, but if you include dividends reinvisted the ASX got back to break even from Nov 2007 by mid-late 2013, just under 6 years later. Thats under half the time, an incredible difference.

https://uk.investing.com/indices/s-p-asx-200-accumulated

 

[joyousli]

@felonna Then you can use the same logic for property with rental income significantly boosting the returns.

 

[felonna]

@joyousli I always thought it was pretty much impossible to compare the two anyway, given how much leverage is often used in property.

 

[rahmemhotep]

@civil82

I agree with the broad thesis that investors should accept the possibility of >10 years of poor returns. Sadly I often see comments here suggesting users house deposit savings be invested in shares.

I can't plus one this enough. Currently having some frustrating conversations with people who don't seem to be able to understand that 2016-2021 was a historically atypical bull market (minus the covid crash).

As someone with money in index funds, I'd love the next five years to be similar to the last five. Without a crystal ball it's impossible to know though.

 

[mcarans]

@civil82 A thoughtful response and some good points - I agree.

 

[bvumavaranda]

@mcarans Perth 2007 checking in !

Nearly back to breakeven…

 

[resjudicata]

@bvumavaranda Perth 2013 checking in. I don't think I'll ever break even.

 

[rolandjackbrandt]

@mcarans That’s true but with leverage you don’t need to rely on returns that are as high

 

[byastian]

@rolandjackbrandt Yup, times it all by 5.

Share market is in many ways a much better investment for reasons like better diversification, significantly increased liquidity and lower transaction costs. However if someone asked me what should they do with $200k in savings I’d say buy property with the main advantage being leverage and no margin call.

 

[resjudicata]

@byastian I was in a position to get into an investment property around the time COVID came into play and stocks lost ~30%. (mar 2020ish)

I had ~$350,000 cash on the sideline. Instead of buying into stocks I decided to wait on property price will do something similar (over the next few years). Yeh so that was bloody wrong !

It is a weird one... why do investment loans for shares charge ~5% interest but investment property loans charge 2% with lower deposit.

 

[jacob131612]

@resjudicata Liquidity and volatility. You answered your own question.

There’s also an effectively 0% chance a block of dirt within 20km of Sydney or Melbourne won’t be worth > today’s value in 2060, when our population is 40m+

 

[mottotom27]

@resjudicata Because a property doesn't collapse in value by 50% in the space of a few days. You answered your own question with mar2020.

The liquidity benefit of shares is only a benefit if you're holding cash in the form of a letter of credit or similar to a similar or higher value than you've borrowed + other income.

Living isn't free.

 

[confusedmanxx]

@rolandjackbrandt Plus all gains are completely tax free if it's your PPOR

 

[divinejourney]

@mcarans You shouldn’t look at inflation adjusted returns for property because most people leverage when they buy property.

If inflation is 5% and house prices rise 5% in nominal terms, then the real increase is 0%. However, if I took out a 95% LVR mortgage (and assume that rent covers the mortgage interest), then my equity increases by 100% in nominal terms. Hence, with zero % real house price growth you can still generate very high leveraged returns from property.

 

[resjudicata]

@divinejourney Holy shit…this never even occurred to me…

 

[flag777]

@divinejourney And if you buy an apartment or something where the price rise over the last 10-13 years is 0% in real terms and very negative in inflation adjusted terms.

Goes to show with property what/where you buy is even more important than when. It’s like picking an extremely niche stock and then looking at market averages…

 

[mottotom27]

@flag777 But, unlike land banking, the apartment will always yield for you.

 

[nailz]

@divinejourney God this is funny. There’s so many unstated premises in your example and things you’re just glossing over and ignoring that completely run counter to what you’re claiming.

Before right now where does one get interest well below inflation? And why do you assume that’ll continue into the future?

Also if you’re saying rental yeild will cover it then what of unrecoverable costs? Where’s your insurance, council rates, maintenance, property management…

I notice you’re not considering any of those… and unrecoverable costs of investing in property can be very high.

Oh yeah, and good luck getting a freaking 95% LVR on an investment property. Even if the bank allowed you, you would make an immediate massive negative return on your money from LMI and fees and they are not going to give you one of those sweet sub 2% mortgages with all the bells and whistles.

I’m embarrassed people are upvoting you and disappointed as you’re usually smarter than this at least as far as I recognise your username.

Edit: let’s calculate this for the dummies out there

A $50k deposit for a million dollar investment prop in Brisbane will require an upfront expenditure of:

LMI: $43,811
Stamp Duty: $38,025
Transfer fees etc: $3,300
Convayencing and valuation: ~$1,300

So for the low low cost of almost $140,000 you too can own about $50,000 worth of equity in a house, a day 1 drop into the red of 64% and then you get to hope to buggery a 10% market drop doesn’t leave you with a 136% net red.

Great deal. Best investment ever.

Leverage is just that, leverage. The market has already priced in its utility in its ability to work property for extra gain, the market can be dumb but it isn’t that stupid. If your gains are guaranteed they’re already priced in. You also didn’t consider the graphs OP provided, there are actual markets in there with periods of negative returns. How can leverage make a negative net return positive? It doesn’t, not unless your adding on some significant unstated “return” and not factoring for the other unstated loss of unrecoverable costs.

If you start looking at even a mildly “margin safe”50-40% leveraged index fund over any similar long time period and the supposed great performance of property just melts away. It drops off even more when getting into private equity as a comparison.

I get it, people hear these listing prices change over time and just mentally calculate the return but nobody measures (and reports) the unrecoverable costs in the process. Or they happen to buy one property and luck out on timing and prices rocket, but then you’re just playing stock picker if you’re planning to pull that off repeatedly.

I’m not one of the silly “crash is coming” folks, if you wanna buy a house go for it, but people talking like property is the best investment ever are just way off and using weird motivated reasoning to rationalise that; when on scale the performance just isn’t there. I take more exception to the logic than that people would choose property as an asset, property is just… fine.

I now work in property management and have no interest in investing into property more than I already am so take that how you will.